Tandem Skydiving – Is It Subject to Texas Sales Tax?

Not according to the U.S. (DOT) Department of Transportation

Welcome to one of the most debated state sales tax ‘amusement service’ issues in the country. In at least four states, excluding Texas, business owners are fighting and winning the battle over whether they have to charge sales tax on their tandem skydiving services. It should be noted that many ‘Sales Tax’ states have a tax on amusement services which usually includes ‘tandem skydiving services’. Tandem skydiving occurs when a student skydiver is harnessed to an instructor who then guides the student through the entire jump process (i.e., ground training, jump, free fall, chute time and landing).

Dino Marcaccio, President Former Texas Comptroller State Tax Auditor, 16 Years

Dino Marcaccio, President
Former Texas Comptroller State Tax Auditor, 16 Years

Over the last few years, several states have voluntarily or in one case been forced by their own State Court (Supreme Court of Missouri – Case No. SC93039) to stop applying sales tax to any activity occurring within the Federal Air Space because those laws are in direct violation of what is commonly referred to as the United States ‘Anti-Head Tax Act’ (AHTA). Other states that have voluntarily excluded ‘tandem skydiving’ as well as ‘untethered balloon rides’ from being subject to their respective Amusement Sales Tax laws are: Florida, Maryland and Wisconsin (see end notes).

The 12-30-2013 U.S. Department of Transportation (DOT) Guidance Letter – Question on Taxation of Skydiving leaves absolutely no doubt that no state may apply Sales tax on any type of skydiving activity including ‘tandem skydiving’.

In particular the Guidance Letter states:

“Without addressing the specifics of any particular State tax, we can say generally that a State sales tax imposed on the gross receipts from skydiving operations would be preempted by the AHTA as unlawfully levied or collected on the gross receipts from that air commerce or transportation, which includes an individual traveling in air commerce. 49 U.S.C. Section 40116(b)(1),(4).”

Now back to what is happening in Texas in 2015.

It is obvious that the Tax Policy folks at the Texas Comptroller’s Office are not following the national trend or the Department of Transportation (DOT) Guidance Letter of 12-30-2013. As of the date of this article Texas Tax Rule 3.298 ‘Amusement Services’ and the brand new 2015 ‘Taxable Services’ Brochure No. 96-259’ specifically state that ‘skydiving is a taxable amusement service’.  It has been confirmed that this would include ‘tandem skydiving’.

Ironically, it is a fact that many tandem skydiving businesses in Texas are operating under the assumption that their services are not subject to sales tax. That is, most tandem skydiving businesses in Texas do not charge sales tax on their services. This is a serious problem if you just happened to be selected for a random Sales Tax audit by the Texas Comptroller.

Texas Tax Group is currently representing a very small tandem skydiving client with a completed Sales Tax audit. Our client did not charge sales tax on their tandem skydiving services because she relied on the DOT Guidance Letter referred to above that specifically exempted these services. She was also aware that many of her competitors did not charge sales tax either. As you would expect, the auditor ignored our position and assessed Sales Tax on 100% of all tandem skydiving services for the standard four year audit period which resulted in a sales tax audit bill of well over $100,000. This amount will easily put our client out of business. Of course the auditor relied upon the Amusement Services Tax Rule 3.298 for the entire assessment.

Texas Tax Group then filed for an Administrative Hearing and presented our case to the Comptroller Hearings judge, citing the plain exemption language of the 2013 DOT Guidance Letter (see above), the Anti-Head Tax Act (AHTA) and proof of several other states recognizing their mistake and exempting these services. We lost. The judge flatly denied every argument (SOAH No. 304-15-3326.26). As a result, our client will mostly likely lose her business soon because no one at the Texas Comptroller’s Office would listen to reason. It is my opinion that Texas will eventually exempt tandem skydiving services, but it will take a Texas District lawsuit to do it or possibly an opinion from the Texas Attorney General’s Office.

It is sad to realize that if our skydiving client had the resources to file a lawsuit in Texas District Court she might eventually win her case. This is exactly what happened in Missouri (Supreme Court of Missouri – Case No. SC93039). A small hot air balloon company (i.e., similar service as tandem skydiving) decided to take on the Missouri Department of Revenue and they won. Like our client they initially lost in the state’s Administrative Court. Then they took their case to State Court and ultimately The Supreme Court of Missouri decided that no sales tax could be assessed on their services. The Supreme Court’s judges flatly and firmly rejected all the arguments made by the Missouri Department of Revenue State citing the Anti-Head Tax Act (AHTA).

It is obvious that the national trend is for the various ‘Sales Tax States’ to stop taxing tandem skydiving because it is against Federal Anti-Head Tax Act (AHTA). It is my belief that Texas will follow sooner or later. But by that time the Texas Comptroller will have put our client out of business and probably a few more similar companies.

What is even more embarrassing for the Texas Comptroller’s Office is that the Texas Attorney General’s Office has recently settled a Texas Sales Tax audit assessment against another much larger tandem skydiving company – B&B Aviation LLC (District Court – Cause No. D-1-GN-14-003885). This company was audited by the Texas Comptroller, received a tax bill for their skydiving services and then went straight to District Court.  Then, before the case had a chance to be heard in court both sides agreed to an out of court private settlement. The unfortunate result for every skydiving company in Texas is that there is now no final Texas public court decision saying tandem skydiving is not subject to sales tax in Texas. It just stays swept under the rug.

It is obvious the Texas Attorney General believed they would possibly lose this case in a District Court, Court of Appeals or Texas Supreme Court decision (i.e., as in the Missouri Supreme Court case decision previously mentioned in this article). Therefore, they must have offered to settle for a nominal amount. And the skydiving company probably didn’t want the expense and the slight possibility of losing in court and so they took the settlement offer.

Other State’s have shown the foresight to voluntarily exempt tandem skydiving from sales tax.  When will Texas decide to stand up and do the right thing for Texas tandem skydiving companies instead of playing this embarrassing game of ‘gotcha’. The answer is when a skydiving company gets audited and insists on having their day in Texas District Court. And when that day comes I will be sitting front row in the ‘peanut gallery’ to see the State judge tell the Texas Comptroller to stop this nonsense and exempt tandem skydiving.

 

States dropping sales tax on tandem skydiving and untethered balloon rides:

Florida:  Florida State Tax Rule Change – 12A-1.005 (Skydiving exempt from Sales Tax)
Maryland: Maryland Tax Court – No. 09-AA-OO-0849 (Friendship Hot Air Balloon)
Wisconsin: Cancels Sales Tax on Skydiving (2010) Tax Policy News Release

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